How to Operationalize Sustainability Commitments with Moody’s RMS ExposureIQ
Shaheen RazzaqApril 11, 2023
On March 20, 2023, the Intergovernmental Panel on Climate Change (IPCC) issued its Synthesis Report of the Sixth Assessment Report, which summarized the current state of knowledge around climate change, its widespread impacts and risks, and the need for climate change mitigation and adaptation.
In the report, the IPCC issued a sobering assessment on what needs to be done to limit warming to 1.5 degrees Celsius, such as calling on developed countries to accelerate their plans to reach net zero as close to 2040 as possible, some ten years earlier than the previous milestone of 2050.
The property and casualty (P&C) insurance industry has a unique role in the management and mitigation of climate change. A core tenet of their business model is understanding physical risk and providing coverage to protect businesses and individuals from catastrophe losses.
Catastrophe losses, which can be exacerbated by the impact of climate change, pose a direct threat to the long-term profitability of P&C insurers.
Embedding environmental, social, and governance (ESG) factors into decision-making processes presents a new opportunity for firms to demonstrate a commitment to supporting sustainability initiatives while also adding new insights into their underwriting and portfolio management workflows.
Many firms have already made external commitments to ESG ahead of taking action – but for most firms, they are just lost on where to begin.
The latest IPCC report reinforces this urgency to act now, but to do this, firms must be armed with appropriate, actionable insights that can easily be incorporated into insurance workflows. Securing access to relevant ESG data is a typical first starting place, but then what?
It can be a struggle to turn ESG commitments into reality and not just an unfulfilled marketing commitment. Even integrating ESG into a firm’s decision-making processes can pose an immense challenge.
Insurers look to adapt processes that are sometimes decades old, involving complex workflows utilizing Excel workbooks, SQL queries, and custom code. As a result, introducing a new view of risk such as ESG to enhance decision-making within these existing workflows is slow and cumbersome.
And there simply is no time for a firm to commit to a five-year IT project to build a home-grown ESG solution from scratch, insurers need a solution now.
If the IPCC is pushing to accelerate net-zero plans by ten years to 2040, let’s not forget the urgency. It is imperative not to waste valuable time trying to understand the data and generate meaningful insights for your business – while the market passes you by.
Introducing New Analytics for ExposureIQ
In June 2023, ESG analytics will be available in Moody’s RMS ExposureIQ™ as part of Moody’s ESG Insurance Underwriting Solution. Once the ESG data is licensed, the analytics will be instantly available in ExposureIQ (EIQ), our award-winning exposure management application.
Simply import your portfolio of risks, this could be via industry-standard Exposure Data Module (EDM) format or other industry exposure formats such as flat CSV, Excel file, or direct via API. This all means faster time to value for an ESG analytics solution.
Figure 1: ExposureIQ screenshot shows how the application streamlines the importing of a portfolio for ESG insights
Proactively Mitigate and Manage Reputational Risk with Credible ESG Insights
Property and casualty (P&C) insurers are facing pressures from all sides to operationalize their public ESG commitments, from internal and external stakeholders, such as investors, policymakers, and the C-suite – which means understanding the ESG scores of their insureds. Even new university graduates are asking tough questions about a firm’s ESG credentials before accepting an offer.
Two common challenges firms face in building credible ESG scores are linking the insured entity to a score and providing ESG scores for private entities.
Most insured portfolios are composed of a mix of public and private entities, but private entities are much less likely to participate in ESG reporting compared to a major corporate, such as a Fortune 500 company.
To overcome this reporting gap, ExposureIQ leverages Moody’s Analytics' comprehensive corporate entity database, which includes corporate data on more than 425 million entities globally – both public and private.
The solution’s powerful matching algorithm allows insurers to quickly identify the correct insured entity against its database, unlocking the appropriate ESG score and data points.
For insured entities that do not report on their ESG performance, EIQ utilizes Moody’s Analytics ESG Score Predictor, which combines its industry-leading scoring methodology with robust environmental and socioeconomic measures.
The ESG Score Predictor delivers an unparalleled set of globally comparable and standardized scores based on numerous relevant factors assigned to an entity, enabling you to achieve a full portfolio risk assessment and reduce blind spots in your portfolio.
Together these capabilities ensure that each insured entity is assigned a credible score for reporting.
Figure 2: ExposureIQ: Screenshot showing a firm's view of ESG or portfolio risk
Differentiate and Unlock Value with ESG Analytics
With less than half of insurers currently meeting their cost of capital, firms need to explore new ways to expand into new market segments, attract new customers, and stand out among competitors.
ESG offers an exciting opportunity for firms to engage with sustainability-focused organizations using high-quality ESG insights that meet the demands of the most sophisticated clients.
Moody’s RMS offers unique ESG Insights to the insured by leveraging a double materiality approach that provides both a financially-material and sustainability-focused perspectives of ESG risk to the insured.
This domain-defining approach helps the insured understand how their activities impact the environment and society as well as how ESG impacts their core business.
Enhance Decision-making for Risk Selection and Pricing
The secret sauce of underwriting is the ability to leverage high-quality risk insights, and exposure data, with consistent underwriting guidelines in the risk selection and pricing workflow.
Within these underwriting guidelines, firms will often establish parameters or thresholds for acceptable risks such as the year that a property was built, the maximum hazard score for a location, or the maximum amount of exposure allowed within a specific geographic region.
With new ESG analytics within ExposureIQ, underwriters, and portfolio managers have access to the underlying ESG metrics of their insured. Firms can now incorporate ESG scores based on over 200 factors into this process and customize the weight of each based on their own corporate priorities.
In addition, firms will be able to analyze the relationship between ESG scores and insurance metrics, such as premium or claims data. These new factors can help you gain a competitive advantage in a crowded marketplace and gives you yet another lens to assess your insured.
Figure 3: Sample of Moody’s RMS ESG Scores
Operationalizing Your Commitments
Firms are just beginning to integrate ESG factors into their day-to-day operations as a competitive differentiator. In an increasingly competitive marketplace, ExposureIQ’s live portfolio monitoring and customization of a view of ESG risk will help firms maintain business agility and adapt processes to meet evolving market needs.
Managing ESG risk in ExposureIQ, a cloud-native application tailored to the unique needs of exposure and portfolio managers offers a long-term solution helping firms manage ESG risk and transition their portfolios to align with their net-zero commitments.
Shaheen has over a decade of experience delivering risk management solutions to insurance and reinsurance companies. As Vice President - Product Management at Moody's, he is responsible for introducing new, innovative applications to the market.
Before joining Moody's, Shaheen was Risk Aggregations Business Unit Manager at Room Solutions Ltd. and led a department that designed and developed Exact Advantage, a popular, next-generation offshore energy risk aggregation tool. At Room Solutions Ltd, he then managed a global development team that built and successfully implemented several contract and exposure management solutions for large European commercial insurance organizations.
As a regular speaker at industry events, Shaheen often gives presentations about the business value technology delivers to organizations that manage catastrophe and non-catastrophe risk.
Shaheen holds a master’s in business and information technology from Kingston Business School.
